Current through Register Vol. 48, No. 38, September 20, 2024
a)
General Requirements
1) Every person liable
for any tax imposed by the IITA shall keep books and records sufficient to
substantiate all information reported on any income tax, withholding or
information return required under the IITA.
2) The books or records required by this
Section shall be kept at all times available for inspection by the Department
or its duly authorized agents and employees, and shall be retained so long as
the contents may become material in the administration of the IITA. Such books
and records must be kept in the English language. If a person retains records
required to be retained by this Part in both machine-sensible and hardcopy
formats, the person shall, upon request, make the records available to the
Department in machine-sensible format.
3) The Department may require any person, by
notice served upon him, to make returns, render statements, or keep specific
records as will enable the Department to determine whether such person is
liable for tax under the IITA and the correct amount of the tax.
b) What Records Constitute Minimum
Requirement
1) In General. The records
required by this Part shall be kept accurately, but, unless otherwise required
by the IITA, this Part or any tax form, no particular form must be maintained
for keeping the records. These forms and systems of accounting shall be used to
enable the Department to ascertain whether liability for tax is incurred and,
if so, the amount of the liability. Every person who is required by this Part,
instructions applicable to any tax form, or as otherwise required by the
Department, to keep any copy of any return, schedule, statement, or other
document shall keep the copy as a part of his records.
2) Records prepared by Automated Data
Processing Systems (ADP). When an ADP accounting system is used to maintain all
or part of a taxpayer's accounting or financial records, the ADP system must
include a method of producing legible and readable records that will provide
the necessary information for verifying tax liabilities. If a taxpayer retains
records required to be retained by this Part in both machine-sensible and
hardcopy formats, the taxpayer shall, upon request, make the records available
to the Department in machine-sensible format in accordance with subsection
(g)(2) of this Section. An ADP system must not be subject, in whole or in part,
to any agreement (such as a contract or license) that would limit or restrict
the Department's access to and use of the ADP system on the taxpayer's premises
(or any other place where the ADP system is maintained), including personnel,
hardware, software, files, indexes, and software documentation. ADP accounting
systems encompass all types of data processing systems, stand-alone or
networked microcomputer systems, Database Management Systems (DBMS) and systems
using Electronic Data Interchange (EDI) technology.
c) Definitions
"Database Management System" or "DBMS" means a software
system that creates, controls, relates, retrieves and provides accessibility to
data stored in a database.
"Electronic Data Interchange" or "EDI technology" means the
computer-to-computer exchange of business transactions in a standardized
structured electronic format.
"Hardcopy" means any documents, records, reports, or other
data printed on paper.
"Machine-sensible record" means a collection of related
information in an electronic format. Machine-sensible records do not include
hardcopy records that are created or recorded on paper or stored in or by an
imaging system such as microfilm, microfiche or storage-only imaging
systems.
"Storage-only imaging systems" means a system of computer
hardware and software that provides for the storage, retention and retrieval of
documents originally created on paper. It does not include any system, or part
of a system, that manipulates or processes any information or data contained on
the document in any manner other than to reproduce the document in hardcopy or
as an optical image.
d)
Recordkeeping Requirements for Machine-Sensible Records
1) General Requirements
A) Machine-sensible records used to establish
tax compliance shall be retained by the taxpayer in accordance with the
requirements of this Section. The retained records shall provide sufficient
information to establish matters required to be shown by a taxpayer in any tax
or information returns. The machine-sensible records shall contain sufficient
transaction-level detail information so that the details and the source
documents underlying the machine-sensible records can be identified and made
available to the Department upon request.
B) The retained records should reconcile to
the books and the tax returns by establishing the relationship (i.e., audit
trail) between the total of the amounts in the retained records to the totals
in the books and to the tax returns.
C) The retained records must be capable of
being processed. For purposes of this Section, "capable of being processed"
means to be able to retrieve, manipulate, print hardcopy, or produce other
output. This term does not encompass any requirement that the program or system
that created the computer data be available to process the data unless the
process is essential to a tax-related computation.
D) Taxpayers are not required to construct
machine-sensible records other than those created in the ordinary course of
business. A taxpayer who does not create the electronic equivalent of a
traditional paper document in the ordinary course of business is not required
to construct such a record for tax purposes.
E) Electronic Data Interchange (EDI)
i) Where a taxpayer uses EDI processes and
technology, the level of record detail, in combination with other records
related to the transaction, must be equivalent to the level of detail contained
in an acceptable paper record.
ii)
The taxpayer may capture the information necessary to satisfy subsection
(d)(1)(E)(i) at any level within the accounting system and need not retain the
original EDI transaction records, provided the audit trail, authenticity and
integrity of the retained records can be established.
2) Electronic Data Processing
Systems Requirements. The requirements for an electronic data processing
accounting system are similar to that of a manual accounting system, in that an
adequately designed accounting system should incorporate methods and records
that will satisfy the requirements of this Section.
e) Recordkeeping Requirements - ADP Systems
Documentation
1) Upon the request of the
Department, the taxpayer shall provide a description of the business process
that created the retained records. The description shall include the
relationship between the records and the tax documents prepared by the taxpayer
and the measures employed to ensure the authenticity and integrity of the
records.
2) The taxpayer shall be
capable of demonstrating:
A) the functions
being performed as they relate to the flow of data through the
system;
B) the internal controls
used to ensure accurate and reliable processing; and
C) the internal controls used to prevent the
unauthorized addition, alteration or deletion of retained records.
3) The following specific
documentation is required for machine-sensible records pursuant to this
Section:
A) record formats and
layouts;
B) field definitions
(including the meaning of all "codes" used to represent information);
C) file descriptions (e.g., data set name);
and
D) detailed charts of accounts
and account descriptions.
4) Any changes to the items specified in
subsection (e)(2), together with their effective dates, shall be documented and
made available to the Department upon request.
f) Machine-Sensible Records Maintenance
Requirements
1) The establishment of records
management practices is solely at the discretion of the taxpayer, who
ultimately bears the burden of producing records capable of being processed at
the time of an examination by the Department. The Department recommends but
does not require that taxpayers refer to the National Archives and Record
Administration (NARA) standards for guidance on the maintenance and storage of
electronic records. The NARA standards may be found at 36 CFR 1234, subpart C
(1996).
2) In establishing records
management practices, taxpayers should consider, for example, the labeling of
records, the security of the storage environment, the creation of back-up
copies and their storage location and the use of periodic testing to confirm
the continued integrity of the records.
3) The taxpayer's computer hardware or
software shall accommodate the processing of or the extraction and conversion
of retained machine-sensible records.
g) Access to Machine-Sensible Records. The
manner in which the Department is provided access to machine-sensible records
as required by this Part may be satisfied through a variety of means that shall
take into account a taxpayer's facts and circumstances. Access will be provided
in one or more of the following manners:
1) A
taxpayer may provide the Department copies of the machine-sensible records for
use on the Department's equipment;
2) The taxpayer may arrange to provide the
Department with the hardware, software and personnel resources necessary to
access and process the machine-sensible records;
3) The taxpayer may arrange for a third party
to provide the hardware, software and personnel resources necessary to access
and process the machine-sensible records;
4) The taxpayer may convert machine-sensible
records to a standard record format specified by the Department on a magnetic
medium that is agreed to by the Department. This may include conversion to a
different medium (e.g., from mainframe files to microcomputer diskette). These
records may be processed on the Department's equipment or at the taxpayer's
location;
5) The taxpayer and the
Department may agree on other means of providing access to the machine-sensible
records.
h) Taxpayer
Responsibility and Discretionary Authority
1)
In discharging their responsibilities under this Section, taxpayers are
empowered to determine which of their machine-sensible records must be retained
and which records may be discarded. These determinations require a
consideration of all the facts and circumstances, including whether duplicated
or redundant records exist.
2) In
general, taxpayers should retain the machine-sensible records that are the most
direct evidence of the transactions, and have discretion to discard duplicated
records and redundant information. In exercising this discretion, the taxpayer
should generally retain those records that best facilitate the retrieval and
processing of the data during an audit. For example, Departmental records
stored in Departmental data files that are duplicated in a central system could
be discarded provided that all required information in the Departmental records
is contained in the central system and the requirements of this Section are
met. Similarly, daily or weekly data files could be discarded if appropriate
monthly, quarterly or annual data files with the ability to access appropriate
transaction-level records are available.
3) In conjunction with meeting the
requirements of this Section, a taxpayer may create files solely for the use of
the Department. For example, if a database management system is used, it is
consistent with this Section for the taxpayer to create and retain a file that
contains the transaction-level detail from the database management system and
that meets the requirements of this Section. The taxpayer should document the
process that created the separate file to show the relationship between that
file and the original records.
4) A
taxpayer may contract with a third party to provide custodial or management
services of the records. The contract shall not relieve the taxpayer of its
responsibilities under this Section.
i) Alternative Storage Media. For purposes of
storage and retention, taxpayers may convert hardcopy documents received or
produced in the normal course of business and required to be retained under
this Section to microfilm, microfiche or other storage-only imaging systems and
may discard the original hardcopy documents, provided the conditions of this
Section are met. These records are not a substitute for machine-sensible
records (e.g., magnetic tapes, magnetic cartridges or magnetic disks) as
defined in subsection (c). Documents that may be stored on these media include,
but are not limited to, general books of account, journals, voucher registers,
general and subsidiary ledgers and supporting records of details, such as sales
invoices and purchase invoices. Microfilm, microfiche and other storage-only
imaging systems shall meet the following requirements:
1) Documentation establishing the procedures
for converting the hardcopy documents to microfilm, microfiche or other
storage-only imaging systems must be maintained and made available on request.
That documentation shall, at a minimum, contain sufficient description to allow
an original document to be followed through the conversion system as well as
internal procedures established for inspection and quality assurance.
2) Procedures must be established for the
effective identification, processing, storage and preservation of the stored
documents and for making them available for the periods they are required to be
retained under this Section.
3) All
data stored on microfilm, microfiche or other storage-only imaging systems must
be maintained and arranged in a manner that permits the location of any
particular record.
4) Microfiche,
microfilm or other storage-only imaging systems records must be indexed,
cross-referenced and labeled to show beginning and ending numbers or beginning
and ending alphabetical listing of documents included, and must be
systematically filed to permit the immediate location of any particular record.
A posting reference must be on each document and a control log or catalog of
the documents must be maintained.
5) Upon request of the Department, a taxpayer
must provide facilities and equipment, in good working order, for reading,
locating and reproducing any documents maintained on microfilm, microfiche or
other storage-only imaging systems.
6) When displayed on such equipment or
reproduced on paper, the documents must exhibit a high degree of legibility and
readability. For this purpose, legibility is defined as the quality of a letter
or numeral that enables the observer to identify it positively and quickly to
the exclusion of all other letters or numerals. Readability is defined as the
quality of a group of letters or numerals being recognized as words or complete
numbers.
7) There must not be
substantial evidence that the microfilm, microfiche or other storage-only
imaging systems lack authenticity or integrity.
j) Effect on Hardcopy Recordkeeping
Requirements
1) Hardcopy records may be
retained on a recordkeeping medium provided in subsection (i).
2) If hardcopy records are not produced or
received or required to be produced or received in the ordinary course of
transacting business (i.e., when the taxpayer uses EDI technology), such
hardcopy records need not be created.
3) Unless hardcopy records are required to be
provided or received, hardcopy records generated at the time of a transaction
need not be retained if all the details relating to the transaction are
subsequently received by the taxpayer in an EDI transaction and are retained by
the taxpayer in accordance with this Section.
4) Computer print-outs that are created for
validation, control or other temporary purposes need not be retained.
5) Nothing in this Section shall prevent the
Department from requesting hardcopy print-outs of retained machine-sensible
records. These requests may be made either at the time of an examination or in
conjunction with the evaluation described in subsection (k)(2)(G) of this
Section.
k) Department
Authorization to Destroy Records Sooner Than Would Otherwise Be Permissible
1) In all cases, the Department may, in
writing, authorize the destruction of books and records and other papers prior
to the expiration of the periods of time during which the taxpayer, except for
the written authorization from the Department, is required to keep books and
records. The Department may authorize destruction of records if the records are
preserved in microfilm, microfiche, other storage-only imaging systems or an
electronic data processing system and meet the conditions prescribed in this
Section.
2) Record Retention
Limitation Agreements
A) The Department may,
at the request of the taxpayer, enter into a record retention limitation
agreement with a taxpayer that may modify or waive any of the specific
requirements of this Section. A taxpayer's request for an agreement must
specify which records (if any) the taxpayer proposes not to retain and provide
the reasons for not retaining those records as well as proposing any other
terms of the requested agreement. The taxpayer shall remain subject to all the
requirements of this Section that are not modified, waived or superseded by a
duly approved record retention limitation agreement.
B) The Department may revoke or modify a
record retention limitation agreement or any provision of an
agreement.
C) The record retention
limitation agreement shall specifically identify which of the taxpayer's
records the Department has determined are not necessary for retention and which
the taxpayer may discard. The agreement shall also clearly state each
authorized variance, if any, from the normal provisions of this Section. The
agreement shall also document other understandings reached with the Department,
which may include, but not be limited to:
i)
the conversion of files created on an obsolete computer system;
ii) restoration of lost or damaged files and
the actions to be taken;
iii) use
of taxpayer computer resources.
D) The Department shall consider a taxpayer's
request for a record retention limitation agreement and notify the taxpayer of
the actions to be taken. The Department's decision to enter or not to enter
into a record retention limitation agreement shall not relieve the taxpayer of
the responsibility under this Section to keep adequate and complete records
necessary to a determination of tax liability.
E) Unless otherwise specified, an agreement
shall not apply to accounting and tax systems added subsequent to the effective
date of the agreement. All machine-sensible records produced by a subsequently
added accounting or tax system shall be retained by the taxpayer in accordance
with this Section until a new agreement is entered into with the
Department.
F) Unless otherwise
specified, an agreement shall not apply to any subsidiary or other entity that,
subsequent to the effective date of a record retention limitation agreement, is
acquired by the taxpayer. All machine-sensible records produced by the acquired
subsidiary shall be retained pursuant to this Section and any record retention
limitation agreement that may have been in effect for the acquired subsidiary
("pre-acquisition agreement"). The provisions of the pre-acquisition agreement
shall continue to apply to the acquired subsidiary until revoked or modified by
the Department or a new agreement applying to the acquired subsidiary is
entered.
G) To evaluate the
propriety of a record retention limitation agreement, the Department may
conduct an evaluation of the taxpayer's record retention practices. The
evaluation may include a review of the taxpayer's relevant data processing and
accounting systems, including systems using EDI technology.
i) The Department shall notify the taxpayer
of the results of any evaluation, including acceptance or rejection of any
proposals made by the taxpayer (e.g., to discard certain records) or any
changes considered necessary to bring the taxpayer's practices into compliance
with this Section.
ii) The
evaluation of a taxpayer's records retention practices is not directly related
to the determination of tax reporting accuracy for a particular period or
return, nor is the evaluation an "audit".